Janet Yellen Stands For Something That Has Never Worked

They haven't prompted a real recovery for pushing a decade now (Photo credit: Wikipedia)

Now that the only melodrama in the history of the selection of the Federal Reserve chair nominee has been resolved in favor of Janet Yellen, a moment must be taken as to this figure’s aptness given our current circumstances.

By all accounts, and these range from Yellen’s significant academic paper trail, her work at the top of President Bill Clinton’s Council of Economic Advisors, and her years now as vice-chair of the Fed, Yellen is a major monetary dove.

This means that she wants the Federal Reserve to work strenuously, as it has under outgoing chair Ben Bernanke, to buy up bonds and such out there in the private markets so as to increase theoretically available credit beyond any conventional constraint. In the usual parlance, she wants money to be loose.

The funny thing about loose money is that it has no record of solving recessions. It is not clear that there is even one example in the history of the Fed over these last 100 years where loose money has borne along an economic recovery.

We often hear of how “Keynesianism” and “government activism” gave us recoveries from the Great Depression and the run of post-World War II prosperity. It is useful to remember that this claim has never properly included Fed blowouts as part of the activism.

In 1934, for example, the first year of recovery from the Great Depression, President Franklin Delano Roosevelt reestablished the gold standard—he did indeed—giving the Fed a tangible benchmark in its conduct of monetary policy. This gold standard lasted through thick and thin all the way until 1971.

Over these thirty-seven years, the Fed was rarely free to be unduly loose. One time was during World War II, when the Fed printed mightily under the cover of price controls and a broken world gold market. This resulted in a shortage of regular goods in the private economy—not a characteristic of economic recovery. When the war ended in 1945, the controls were lifted, the Fed switched to keeping its eye on the gold price, and postwar prosperity ensued.

Another example came fifteen years hence. After the recession of 1960, the Fed tried to loosen as the government attempted to fix the private price of gold. This elicited Blue Chip forecasts for another recession and a 30% drop in stocks. The Fed dropped its looseness, let gold resume its guidance on monetary policy, and the mega-growth of the 1960s followed.

A rule was established, if only implicitly. Fed looseness will stall out recovery, while good attention to the status of gold will put recovery in play.

Then came President Richard Nixon and his cashiering of the gold standard in 1971. The Fed now had before it a decade of monetary activism. The 1970s would see the most notorious episodes of loosening until our current day.

Thus were the 1970s the stagflation decade. As gold shot up 23-fold on the private markets, consumer prices leapt by 150%, unemployment went from 4% to a range of 7-11%, and economic growth slowed to a crawl.

Amidst this comedy, in 1979, Paul Volcker became Fed chair. He tried tightening in various ways. He only found one that worked in 1982, when he figured that targeting the private gold price was the way to go. This became de facto Fed policy for the next twenty years. Gold parked at $300 in response. From 1982 to 2000, the Dow Jones Industrial Average went up 15-fold and 30 million new jobs materialized.

Then beginning in 2002, and in contravention of all precedent, the Fed moved to loosen against conventional metrics, in particular gold. Gold marched up from its $300 Reagan-Clinton-Gingrich boom-time stability, all the way to $1000 an ounce at the dawn of the Great Recession. Through the “quantitative easing” episodes of the President Barack Obama era, gold amped up another 80%. It is now poised at some $1350.

And nary a recovery worthy of the name in sight.

It is one thing to contend that super-sized monetary easings are advisable in the teeth of a crisis. It is quite another to say that unconventional monetary policy of a loose variety has any record at all, across our well-populated history of recessions, of bringing the economy to recovery. It has never happened. Moreover, the only things that sustained episodes of looseness have ever given us are the stagflation era and the lost half-generation of the 21st century.